The Indian equity markets touched their 28-month low recently on account of global and domestic concerns. Amar Ambani, head of research at brokerage firm IIFL (India Infoline), tells Puneet Wadhwa he expects more selling by foreign institutional investors. Edited excerpts:
Some market participants expect the Nifty to slip below 4,400 levels. Do you agree? What are your calendar year-end and financial year-end targets?
Demand moderation and margin pressures are expected to result in growth deceleration in corporate earnings for the next four to five quarters. Based on the estimation of a mere 8-10 per cent earnings growth in FY13 for the Nifty, our fair value estimate stands at around 4,500. The market can deviate 10-15 per cent on both sides from fair value and therefore, a level of 4,400 or even lower is a possibility.
We feel the Reserve Bank of India (RBI) may not initiate rate cuts before March 2012, till it is convinced about decline in inflation.
With upcoming state elections and political logjam, policy action will remain halted and, given fiscal constraints, the budget is unlikely to excite and may be driven by populist measures. It’s hard to put a target number, but the overall trend of the market is downward. The market will most likely form a bottom in the coming months.
How different or similar are we now as compared to the crash in 2008?
As far as the global economy is concerned, people say we may see a double dip. However, we are seeing a continuation of the problems which started in 2008. If anything, these have intensified from a credit-related crisis to a sovereign crisis.
As far as India is concerned, things are worse than they were in 2008, because of a string of domestic problems that have surfaced since 2010.
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Are the Indian markets still expensive as compared to their emerging market counterparts? How are FIIs (foreign institutional investors) viewing developments on the domestic front such as lower GDP and inflation woes?
Indian equities have underperformed, compared to most global peers in the last few months. While the historical premium may have narrowed, one must not overlook the fact that ROEs have fallen by 500-600 bps to levels much closer to counterparts.
Part of the reason for FII selling has been the flight to safety. However, domestic problems have compounded the selling; lack of reforms and unaffordable populist measures like the Food Security Bill.
While statistically inflation may decline, structurally it will remain elevated. Lack of policy response through rate cuts will mean GDP growth will be 6.5-seven per cent in FY13. We think one big round of FII selling is yet to come.
What is your strategy at current levels? What sectors/stocks are you bullish on in the current environment?
Debt will continue to remain the most attractive asset class in the coming months. This is one place that investors should be in. As far as equities are concerned, our strategy is to remain in defensive sectors like pharmaceuticals, fast-moving consumer goods (FMCG) and information technology (IT) in the medium term. Our approach is stock-specific, and investors should look to accumulate large caps on declines.
Do you see any value emerging in the banking space, either public or private?
We are negative on banks at present, what with an expected slowdown in credit growth, continued pressure on NIMs and concerns over asset quality deterioration. Valuations are getting relatively cheaper, but more downside looks on the cards.
Investors can look at lower levels to accumulate banks with strong capital adequacy, low exposure to SMEs and infra, high ROA and stable asset quality. Clearly, the private sector fits better than PSU banks.
Do you expect more pressure on margins and overall profitability of India Inc in Q3, given the inflation and interest costs? Which companies/sectors are likely to be impacted most?
With interest rates firming up and headline growth slowing down, Q3 earnings will be affected when compared on a year-on-year basis.
However, we could see some sequential relief with some companies benefiting from rupee depreciation and strong pricing power.
IT and pharma would be the only sectors to report higher margins on a year-on-year basis. The worst performing sectors would be infrastructure and capital goods, where margins are consistently getting squeezed by intensifying competition, execution issues, higher raw material prices and interest rates.
How do you see the rupee shaping up against the US dollar in the near-to-medium term? Is the worst behind us now?
In terms of the extent of the slide, the major depreciation in the rupee has already taken place. However, one cannot rule out a further downside versus the USD. Euro weakness is likely to continue even as US sees better reported data.
Furthermore,the rupee will be under threat if the current account deficit balloons, and if the RBI chooses not to intervene in the currency market.